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Biding time

Even as rising geopolitical risks are supporting oil prices, timespreads are languishing. Huge volumes of destocking, a sell-off in gasoil and the build-up of some unsold cargoes in Asia are dominating. For Brent in particular, the recent sell-off in WTI-Brent will ensure high US exports through year end and the overhang of West African grades is adding further woes.

Both Brent and Dubai spreads will strengthen as over 3 mb/d of refining capacity returns from works between October and December, but we need to wait for the destocked crude to be absorbed. There are also the usual concerns around Q1 18 crude demand as refinery works pick up, but given the Middle East’s volume of turnarounds next spring, crude builds will be limited if OPEC manages to keep a tight rein on exports even as their key refineries undergo works.

China is also playing an important role in keeping a lid on timespreads. A clear contradiction between policy agendas within the government, with trade liberalisation on one hand, and environmental protection and supply-side reforms on the other, is making refiners cautious, especially as, in a backwardated market, the incentive to store crude is simply not there.

And with oil prices close to $65, discretionary buying for SPR and commercial tanks has also taken a breather. China has filled reserves at substantially higher prices in the past, so buying will return, but the urgency to hoard will be lower and we will have to wait until $60 oil is accepted as the new norm in the Chinese psyche. This is also true of discretionary buying around the world. So, at a time when positioning is at a record high, the market has to bide its time. In any case, a bit of a correction in oil prices ahead of the 30 November OPEC meeting would not be a bad thing.